Who's Running Your Company: You or Your Client?

Alan is the non-executive chairman of KLAS Enterprises, a leading provider of healthcare information services. He is also the President of Polus Capital, a provider of entrepreneur-friendly capital to growing and profitable businesses based out of Houston. He was formerly the founder and CEO of MercuryMD.

Venture capitalists like to use the word “traction.” It sounds all glamorous, like an ad showing a Range Rover toughing it out up some impossible incline. But when I hear a company talk about ‘early traction’ in its pitch, I’m always leery of the “First and Worst” effect.

My first customer at my first company was a grandfatherly CIO at a big hospital. Of course I wanted to please him, and was enthusiastic about doing so. But I was also very focused on taking over the world with our software. I told him, “We’ll change anything you want about the product, as long as it’ll be good for all our future [gazillion] customers.”

Of course, The Grandfather wanted lots of one-off customizations that would really only be good for him. I told him that all the time we spent doing custom work for him was going to make us less profitable, and less likely to be able to sell the product to other people. And to survive long enough to do any improvements to the product at all, we needed to be profitable. He seemed to think that made sense, and begrudgingly agreed.

In the end this arrangement was a win for both of us. Our product was a home run for his hospital. We got an evangelical reference customer, and his hospital helped make our product better. The precedent we’d set with The Grandfather gave us the courage to refuse other customers who wanted one-off changes. Sure, we could have done this for one or two hospitals, but by the time we got to hospital 300, it would have been a mess.

Since then, as an entrepreneur and now as a venture capitalist, I’ve seen lots of companies go through this early stage. Usually, companies end up loving their first customers too much. Going forward, these beloved customers actually become the worst customers, because they have too much control over the company’s future. The team gets absorbed in one-off customizations, and their grand vision of high-growth products morphs into a grind of custom services engagements.

There’s nothing wrong with custom work, but products and services companies are inherently different in their scalability, profitability, growth prospects, and enterprise value. The key is in knowing who you want to be and sticking with it. In the early days, it’s hard to know exactly what separates a product company from a services one.

During that first customer stage, I asked two simple questions to stay on track.

Can I replicate what I’m about to do with my next 100 customers? That first one-off seems harmless, but they add up to slow down development, increase maintenance burden, and reduce sales efficiency.

Am I willing to walk away from this business? This is the ultimate test – not all customers are good for your strategy. I ended up turning down or firing customers that weren’t good for us.

Ultimately, the key is to be clear on what you want to be, and in being disciplined about getting there.